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The Government has published its response to consultation on unconnected multi-employer CDC schemes (UMESs) alongside draft regulations which are due to come into force next summer. It has also issued a consultation paper on the use of CDC as decumulation option for DC schemes – referred to as “retirement CDC”. 

Together, these measures seem likely to lead to a significant growth in CDC schemes over the next decade and, hopefully, better outcomes for DC members. The Government’s press release says that CDC schemes could increase retirement incomes by as much as 60%. This is clearly a beneficial opportunity for the UK pensions market in and of itself and is particularly important given that Government research estimates that private pension income for individuals retiring in 2050 could be 8% lower than for those retiring in 2025.

Background

In a CDC scheme employers and employees pay fixed contributions to fund a target retirement benefit. Benefits are provided directly from the scheme but are not guaranteed. Members, including pensioners, collectively bear the longevity and investment risk, which means that pensions in payment can go down as well as up. 

The key advantages of CDC schemes are certainty of costs for employers, pooled longevity risk for members, and potentially higher investment returns (as the collective nature of the scheme means that it’s easier to keep money invested for a longer time horizon and take advantage of both being invested in return-seeking assets for longer and the higher returns offered by more illiquid investments).

Under the current legislation, CDC schemes must be for single or connected employers only (preventing commercial schemes from being set up), authorised by TPR and established and run by fit and proper persons. They must also satisfy various design and operational requirements.

CDC schemes for unconnected employers

In July this year, the Government set up a new Pensions Commission to address the concern that tomorrow’s pensioners are likely to be worse off than today’s. In part, this is because although auto-enrolment has increased pensions coverage, pension contributions have fallen. For many people, DC does not provide nearly the level of income that the DB schemes of yesterday would have done.

New pensions models could address some of the shortfall and in October 2024, the Government launched a consultation on draft regulations to allow UMESs. It has now responded to that consultation and issued draft regulations to allow UMESs to be established which are intended to come into force at the end of July 2026. Key points to note include:

  • As with other CDC schemes, UMESs will need to be authorised by TPR and the regime shares many similarities with the master trust regime. The authorisation criteria include requirements that those involved in the scheme are fit and proper, the design of the scheme is sound and it is financially sustainable. There are also requirements around member communications and ongoing operational systems. TPR will issue a code of practice in due course.
  • Unlike other CDC schemes, UMESs will need a scheme proprietor who is liable to meet at least some of the costs of setting it up and the costs where things go wrong or there is a shortfall from other sources. TPR will look at the financial resources of the scheme proprietor and it cannot be the scheme trustee.
  • The authorisation process will include a viability report from the trustee, approved by the scheme proprietor which amongst other things, sets out how benefits are determined, the investment strategy and whether the scheme design is sound. It will need to be accompanied by a certificate from the scheme actuary in relation to issues such as the level of increases and benefits.
  • TPR will need to be satisfied that the business strategy of an UMES is financially sound and the scheme proprietor will need to submit a business plan.
  • Because it is envisaged that UMESs will be provided on a commercial basis, marketing and promotion cannot be unclear or misleading and schemes will need to have adequate systems and processes for ensuring this is the case. The information given to employers about a scheme and target benefits needs to be realistic. Ensuring employers clearly understand how one UMES compares with another will be key to the industry developing confidence in them.
  • Benefits will need to be valued and adjusted every year to keep the value of assets and anticipated costs in balance. While schemes will target a particular annual increase, it is inevitable that funding will vary over time and therefore annual adjustments will need to vary. There are strict rules in relation to such adjustments to ensure that one cohort of members is not deliberately preferred over another.
  • Legislation already requires CDC schemes to ensure benefits with different characteristics are in separate sections. A new section will need to be created in an UMES where a change to the investment strategy results in materially different benefit rates or expected adjustments to benefits. Trustees will need to explain in their viability report what changes in the investment strategy they consider would require the opening of a new section.
  • Existing transfer legislation will be amended to allow bulk transfers without consent to be made into authorised UMESs to help them build scale.

We are excited to see how many UMESs apply for authorisation and the levels of benefit they target. It will also be interesting to see how far the investment strategies of any UMESs lean-in to the productive finance type investments that the Government would like to see and how they mitigate potential risks.

Finally, it is worth watching out for whether the Pension Commission’s adequacy review will come up with any recommendations that encourage employers to look more closely at CDC as an option for auto-enrolment.

CDC as a decumulation option

The Pension Schemes Bill contains provisions which will require trustees to offer DC members a default retirement solution which would provide them with a pension income. They will be able to provide a default using another scheme if it is not reasonably practicable to do so in their scheme and if this would provide a better outcome for the members. The Government says that allowing a transfer to a CDC scheme on retirement could be an option and that some providers have expressed an interest in offering this benefit.

A new consultation paper looks at how this type of “retirement CDC” arrangement could work. The key elements of the Government’s proposals include:

  • Retirement CDC benefits could be provided by existing master trusts or UMESs. Master trusts would need to seek authorisation using the authorisation process above whereas UMESs would need to submit a revised business plan.
  • It will not be possible to offer a non-escalating retirement benefit but otherwise, the Government’s intention is to ensure that the new regime is sufficiently flexible to accommodate a range of designs.
  • Unlike whole-life CDC schemes, retirement CDC schemes will be paying out benefits straight away. This means that their investment strategies will need to allow for greater liquidity and administrative systems will need to provide for the payment of pensions from day one. This could lead to greater set-up costs.
  • Scale will be built by members transferring significant sums at retirement which means that greater scale can be built with fewer members. Schemes will need to demonstrate the inward flow of members at authorisation, to show how they will achieve scale and sustainability.
  • The UMES marketing and promotion requirements will be adjusted to reflect the fact that retirement CDC schemes will not be selected by employers but by trustees. It is not intended that retirement CDC will be available directly to individuals, so promotion and marketing to prospective and existing members will be prohibited.
  • Existing transfer provisions would be amended to allow trustees to transfer members to a retirement CDC scheme.
  • There will be requirements around determining the level of benefits that any transfer credits will secure, but it will be possible to apply different pricing and benefit adjustments to different cohorts.
  • The Government invites views as to whether using projected income from a retirement CDC scheme would be appropriate in a statutory money purchase illustration and how such illustrations could be made consistent and not misleading.
  • A charge cap is being considered and views are sought as to what level might be appropriate.

 Consultation closes on 4 December 2025.

What next?

UMESs will be with us next summer, if all goes to plan, and retirement CDC schemes will follow later – possibly by 2027 to tie in with the projected timescale for master trusts to begin offering guided retirement options (with other DC schemes following in 2028).

The Government’s press release says that: “Research shows almost three-quarters of people with DC schemes want a guaranteed income from their pension”, so there is the potential for significant take-up of CDC schemes and we expect the market to grow significantly by 2030.

It will be fascinating to see which employers and providers follow Royal Mail in taking advantage of the opportunities offered by CDC.